Major Markets May 2024

Major Markets Updates are a monthly and as needed piece designed to give us an overview of the broader market and certain sectors. Using Elliott Waves we can effectively show the sentiment of markets in near real time. This allows us to game plan.

Remember, “trader narratives” hit the internet to try to keep you from doing the right things and even do the wrong things. It is “a loose affiliation of millionaires, billionaires and baby.” Retail is the baby.

US DOLLAR INDEX

The dollar impacts every other asset class since most things trade in dollars – at least to a significant degree. When the dollar is too strong, other nations experience inflation. When it is very weak that is a sign of a weak American economy and usually a global recession or at least weakness.

Since Kirk called a long-term bull market in the dollar versus other currencies back in 2012, the dollar has in fact appreciated on a consistent basis. The recent spike could double top or even go higher if the Fed indeed keeps rates higher for longer. While we do not think that is a base case, it does seem to be becoming more likely.

Watch the dollar to know if we are going to see a larger stock market correction.

DXY

20-year U.S. Treasuries

Long-term interest rates reflect the perception of the intermediate term economy – not the long-term. The long-end of the U.S. Treasury curve has risen, but not as much as the short-end. That implies two things. One, the Fed is relatively tight now. Two, the long-end simply cannot muster enough optimism to drive rates higher. This is a harbinger of future economic weakness which will result in rate cutting by the Federal Reserve.

I am not sure if the 20-year can get much past 5%, so it is in some sort of bottoming process. I have slowly started to scale in as recession insurance in appropriate retiree and 401k accounts. I don’t think growth investors do this unless TLT gets into the $70s. Retirees and 401k participants can take very small positions with the idea of adding on new lows.

TLT

S&P 500

The S&P 500 is the proxy benchmark for “the stock market.” Historically, small caps have outperformed the large caps, however, since half of folks started indexing to the S&P 500 after the Financial Crisis, large caps have done better.

There is a problem with thinking that relationship will continue. It has been an extremely high liquidity economy since the Financial Crisis with an additional jolt of stimulus after Covid. As the Boomers retire, liquidity will be more choppy most likely. At some point, that hurts large caps.

In fact, I believe after a top around 6000+ we will see a choppy period for the S&P 500 that lasts 5-10 years. That is consistent with other periods where small caps outperformed for long periods. In addition, SPY and VOO are not close to being the best large cap ETFs.

SPY

NASDAQ 100

People like to say there is a bubble in big tech, but there are usually wrong. The simple fact is that the 20 largest companies in the QQQ have about 70-80% of all the cash on American corporate balance sheets. These are extremely strong companies that are functionally oligopolists in most cases. That means they have strong pricing power, margins and earnings.

QQQ has consistently outperformed SPY over most 3-year or longer rolling time frames for over 20 years now, that is, post dot-com crash. Most 5-10% corrections in QQQ should be bought. I can see a slightly larger correction if the dollar surges higher.

We are targeting a price around $400 to significantly add to QQQ if the dollar is choppy. If the dollar surges, then we will look for a price closer to $335-350.

QQQ

RUSSELL 2000

As a group, if the dollar remains strong, and especially if it gets stronger, then small caps as a group can get weaker. But, as we know by now, we do not buy inefficient indexes and their ETFs like IWM. The iShares Russell 2000 is simply a benchmark for monitoring the health of the small cap space. If you want to buy small caps, use the two factor ETFs or pick out a dozen small caps to know and know better than the rest. The biggest money is in owning a dozen small caps and being very right on several without getting blown up on the others.

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Bitcoin

The backtest appears to be holding and jumped on May 2nd, so, we don’t see the deeper corrections playing out. Bitcoin (BTC-USD) just keeps building up on global adoption. Buy the dips which seem to be holding in a choppy range right now around $60k.

Bitcoin

Kirk’s Investment Quick Take

Large caps benefit from half of investor money going to indexing to the S&P 500 ETFs (SPY) (VOO). That means bad companies also get a bid on their stocks. Big corrections usually come with big events like recessions, a few mega caps tanking, negative macro surprises or war. The biggest mega caps pull in the most money due to getting the most SPYVOO inflows. The best companies are the super cash rich big tech oligopoly companies.

Small caps continue to exhibit the best growth to price value characteristics. Small caps are an inefficient market, so, there’s only a few factor ETFs and mutual funds worth owning. Otherwise, you need to pick out about a dozen small caps that you get to know very well as a compliment to your broader portfolio. We cover those in Sustainable Growth Trends.

Certain REITs seem to be shaping up as a great opportunity ahead of rate cuts sometime this year. Take a look at the Punch Card Dividend Stocks for REITs. We like industrial and residential REITs in particular. Storage are still strong, but tough to find them cheap anymore. Most commercial has a decade of transition and redevelopment to navigate. There will be spots to buy commercial, but generally after huge crashes as new capital comes in. Read about REITs in Retirement Income Options.

Bitcoin is developing into a global currency hedge. That means it could rise to a market cap as high as $30 trillion eventually if it was just 10% of the global currency mix. I think it takes time, but that’s where we see it headed the next decade. Roughly a 3-bagger from here. Higher if we ever buy pizza with it.

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